yppasswd creates DES encrypted passwords even if md5 is set and even if the old password was md5.
*** Bug 22674 has been marked as a duplicate of this bug. ***
Since the ordinary passwd does it right I recommend to remove yppasswd and replace it by a link to passwd.
*** Bug 3243 has been marked as a duplicate of this bug. ***
I think passwd may be broken actually. I think it looks at the local configuration and uses md5 if it is used there. setting an md5 password on the nis server may break login from non-md5 capable machines. I agree that we should set a md5 password if the previous one is md5 though.
yp-tools-2.6-4 sets a MD5 password if the old one was MD5. This is the best we can do I think.
When I try to add a new already crypted password in MD5 format $1$<salt>$<hash> via useradd -p I get a blank entry in my nis shadow table. Certianly this is an easy enough to fix bug.